(19 APRIL 2018)DAILY MARKET BRIEF 2:UK inflation surprises to the downside

After reaching 3.10% in November 2017, UK inflation is giving signs of further slack, a rather positive sign for UK households who benefit from an increasing purchasing power. Published at 2.50% by the office for national statistics, March consumer price index slows down at a stronger pace than expected, given at one-year low. Essentially supported by a decline in clothing, alcoholic beverage and furniture prices, it appears that the inflation pattern is reversing amid continued negative-oriented producer price index numbers (-0.10%). The strong pound recovery started in January 2017 following June 2016 Brexit vote is also a large contributor to that effect due to significant decline in the cost of imported goods within the UK.

Since investors are expecting the Bank of England monetary policy decision to rise its key rate by 25 basis points (fully priced-in scenario) to 0.75% as part of its normalization policy meeting in May 10th, we remain subdued as to the potential of further increase in interest rate for the current year. The scenario of a second hike in November continues to weaken as inflation rapidly approaches the 2% target set by monetary authorities and Brexit negotiation uncertainties softens. Accordingly, we would retain the scenario of continued inflation deceleration amid increasing wage growth and increasing consumer spending for the months to come.

Approaching its ex ante level before Brexit event, the GBP/USD pair is quoted at 2 years high, currently trading at 1.4194, slightly declining and approaching the 1.4185 range in the short-term.

By Vincent Mivelaz